In the 2013-14 federal budget, the minister announced an increase in the income tax rate applicable to ordinary dividends (i.e., dividends paid out of corporate earnings subject to a preferential tax rate, such as the smallbusiness rate) paid after 2013. Currently, ordinary dividends (also sometimes referred to as ineligible dividends) are subject to a gross-up of 25% and a dividend tax credit of 13.33%. The budget proposed to reduce the gross-up to 18% and the dividend tax credit to 11%, resulting in an overall increase in the income tax rate for ordinary dividends. For example, the top marginal federal rate on ordinary dividends will increase from 19.58% to 21.22%.

The combined federal-provincial marginal income tax rates on ordinary dividends will also increase in 2014. Depending on the jurisdiction, the combined top marginal income tax rate increase for 2014 ranges from 1.05% to 4.27% (i.e., the combined tax rates take into account announced changes in provincial personal tax rates for 2013 and 2014). Consequently, corporations may wish to consider paying ordinary dividends to shareholders in 2013 in order to benefit from the lower rate.

There is no change to the federal rate on eligible dividends for 2013 or 2014; however, for some provinces, the combined top marginal income tax rates on eligible dividends will increase for 2013 and 2014 due to announced changes in personal tax rates (i.e., Ontario, Quebec, New Brunswick and BC).

Table A includes the 2013 and 2014 maximum personal marginal rates for dividend income. These rates reflect budget proposals and other announced changes up to 30 June 2013.

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